Rent or Own your Home

Housing prices are starting to rebound and interest rates are still very low, so a lot of people are considering whether or not they should buy a home. But is homeownership the right choice for you and your finances? The answer of course, is "it depends." However, for many there is a clear answer based on where you live, how much money you have saved, and what your future plans are.

The "Rent vs. Own" debate rages on. Here are some important factors you should consider to help determine whether renting or owning a home is the right decision for you.

1. Basic Market Trends
The three most important criteria in setting the value of a home are "location, location, location." That is true, but you might want to add: "timing, timing, timing."

Anyone who watched the gut-wrenching rise and fall of the housing market during the past 10 years can knows that timing has a lot to do with if buying a home becomes a good investment or an anchor tied to your finances.

You want to avoid buying a house at the peak of a housing bubble, obviously!

But how to avoid it? To help you navigate these market variations, use the "price-to-rent" ratio. This is a formula that takes into account the price of renting versus the cost of buying in your area and gives you a sense of whether the market dynamics favor buying or renting.

Also remember that interest rates for mortgages fluctuate over time and it's always better to lock in a low interest rate if you can.

2. Your Financial Picture
One of the main considerations you have to make is this: does your current financial picture put you in a strong position for home ownership? If not, then buying a house will not be a good idea no matter what the market trends indicate.

Evaluate your finances and see if you're prepared for homeownership. Sit down and look at all your financial accounts as well as your income and expectation of future earnings and job security.

First, look at any debt you have and calculate how long it would take you to pay it off. If you have a lot of consumer debt and especially if you're struggling to make your monthly payments, then this may not be a good time for you to buy.

3. How Much Do You Have Saved Up?
Assuming that you're not worried about debt paydown or losing your job, then the most important factor to consider is how much savings you have. Many home purchases require 10 or 20 percent as a down payment on a mortgage.

The right down payment amount and home loan amount for you will depend on the factors mentioned above, but in general it's better to have a lot saved up before you apply for a mortgage.

4. What Are Your Future Plans?
One of the things you always hear people talk about is that it doesn't make sense to buy a house if you plan to move in the next five years -- and this is absolutely true. Why? Because buying a house requires lots of fees and "transaction costs" -- these costs are unavoidable and can total up to 5 percent of the cost of the house or more.

It still depends on the individual situation, of course, but the general rule is to avoid buying if you expect you'll need or want to move anytime soon.